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PotashCorp and Agrium agree to merger

9/14/2016
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Canadian fertilizer producers PotashCorp and Agrium today agreed to a $36-billion merger, less than two weeks after news broke that the two companies were negotiating such a deal. The combined entity would be the largest crop nutrient firm in the world, with about $20.6 billion per year in revenues, the companies say. It will combine potash, nitrogen and phosphate operations with Agrium’s retail business, which provides a route-to-market for such products.

Under the terms of the merger-of-equals deal, PotashCorp shareholders will own 52% of the new entity, while Agrium shareholders will own 48%. Each PotashCorp shareholder will receive 0.4 common shares of the new company–which has yet to be named–per common share owned, while each Agrium shareholder will receive 2.23 shares in the new company per common share owned. The merger is expected to be complete by mid-2017.

Agrium and PotashCorp generated about $4.7 billion in combined EBITDA during 2015. The two have about 22 million metric tons/year of potash capacity and operate about 1,400 retail locations. Around 90% of Agrium and PotashCorp’s combined earnings are generated in North America.

The two companies expect operating cost savings of about $500 million/year to result from the merger. The cost savings are expected to materialize within two years of the closing date, company executives said during a conference call on merger earlier today. About half of the savings are expected to appear within one year.

Distribution synergies are a key driver for the deal, as Agrium’s retail business has reported more stable earnings during the recent agchems downturn, according to Fitch Ratings (New York), a credit ratings service. “Although there are short-term benefits for both companies, the transaction is bigger than the commodity price cycle,” says Monica Bonar, senior director with Fitch Ratings. “Synergies in their distribution channel are a valuable asset to have in their own right, and will improve market reach and allow the company to optimize its product margins.”

The wholesale and retail businesses will complement each other, says PotashCorp president and CEO Jochen Tilk. Agrium’s retail business “is very complementary…to our potash, nitrogen and phosphate businesses,” Tilk adds.

Analysts at Bernstein praised the merger when news of the talks first broke, and they reiterated that today. “We re-emphasize that this is a merger that makes a lot of sense, and in an industry that is well overdue for consolidation,” says Jonas Oxgaard, an analyst with Bernstein (New York).

“In the short term, this is more positive for PotashCorp than it is for Agrium, as Agrium contributes more net income proportionally in the short-term, but in the longer-term we believe it to be a positive for Agrium as well,” Oxgaard says.
Low crop prices drove the PotashCorp and Agrium to consider a merger, according to Bala Suresh, senior consultant and director with IHS Chemical. “Prices of fertilizers, especially potash, have fallen from about $450/metric ton in December 2012 to currently about $200/metric ton due to weak demand and oversupply,” Suresh said in late August. This compares with prices of around $900/metric ton at the peak of the market in 2008, Suresh adds.

Executives at Agrium and PotashCorp expect the potash industry to grow more competitive in the coming years, as new capacity comes online, they said during the merger conference call. “Markets will improve…the deal puts value creation in our hands,” says Chuck Magro, president and CEO of Agrium. Agrium will continue to eye acquisitions in its retail business, Magro adds.

Previous fertilizer deals have come under scrutiny from Canadian regulatory authorities, but Magro and Tilk do not expect issues this time. In 2010, Canadian authorities blocked Australian mining giant BHP Billiton’s (Melbourne) $39-billion attempt to buy out PotashCorp. At the same time, China’s Sinochem was deterred from bidding for PotashCorp due to concern over Canda’s foreign-takeover review.

However, the current deal–which is between two Canadian companies–appears more likely to pass muster. “Though there have been some concerns from some farm groups, the government has not come out with any alarms publicly yet,” Suresh says. Bernstein “[does] not see major anti-trust hurdles,” Oxgaard says.

The combined company will have 20,000 employees in 18 countries, in addition to a $26 billion market capitalization.
Jochen Tilk will serve as the new company’s executive chairman, while Chuck Magro will be its CEO. Tilk will also be responsible for the new company’s business strategy function. Wayne Brownlee, currently PotashCorp CFO, will be the new company’s CFO, and Steve Douglas, currently Agrium CFO, will be chief integration officer. Other executive appointments for the new firm have not been announced.

The combined company will be headquartered in Saskatoon, Saskatchewan, Canada, and will be a member of Canpotex, the export organization for Saskatchewan’s potash industry. Capotex also includes Mosaic